Question

Using specific examples, discuss the role government agencies play in encouraging and regulating international trade and direct foreign investment.

This short research paper should not exceed 5 pages in length (including text, tables, references, and creative materials). This page limit will lead you to focus on the quality of your research and not on the number of pages you write.

THIS REFERS TO THE U.S

Answer 1

• Foreign direct investment (FDI) occurs when a firm invests directly in facilities to produce or market a product in a foreign country. Once a firm undertakes FDI, it becomes a multinational enterprise
• Two categories of Foreign investment

• Foreign direct investment (FDI) is the investment in physical assets by foreign individuals, companies or financial institutions.
• Foreign portfolio investment (FPI) in the investment made in financial assets. It includes investments made by foreign institutional investors.

• Two main form of FDI

• Greenfield investment

This involves the establishment of a new operation in a foreign country.

E.g., most of Starbucks' expansion has been in the form of greenfield investments, although it did acquire Britain's Seattle Coffee.

• Acquiring or merging with an existing firm in the foreign country

E.g., Acquisitions can be as a minority (where the foreign firm takes a 10 percent to 49 percent interest in the firm's voting stock), or majority (foreign interest of 50 percent to 99 percent), or full outright stake (foreign interest of 100 percent).

The benefits and costs of FDI from both host and home country perspective:

	Host (receiving) country	Home (source) country
Benefits of FDI	Resource-transfer effects Employment effects Balance-of-payments effects Effects on competition and economic growth	The home country's balance of payments benefits from the inward flow of foreign earnings Employment effects MNE learns valuable skills from its exposure to foreign markets that can subsequently be transferred back to the home country
Costs of FDI	Competition within the host nation Adverse effects on the balance of payments The perceived loss of national sovereignty and autonomy.	the initial capital outflow required to finance the FDI (balance of payment issues) the current account of the balance of payments suffers if the purpose of the foreign investment is to serve the home market from a low-cost production location. 3. The FDI could be a substitute for direct exports (balance of payment issues)

The ways in which host government restrict inward FDI

Host countries adopt policies designed both to restrict and to encourage inward FDI.

Restricting inward FDI:

Host governments use a wide range of controls to restrict FDI in one way or another. The twomost common are ownership restraints and performance requirements.

• Ownership restraints can take several forms. In some countries, foreign companies are excluded from specific fields. For example: They are excluded from tobacco and mining in Sweden and from the development of certain natural resources in Brazil, Finland, and Morocco. In other industries, foreign ownership is restricted to 25 percent or less of an airline in the US. Whereas, in India, foreign firms are restricted from owning retail establishments.

The main reasons:

+ Foreign firms are often excluded from certain sectors on the grounds of national security or competition. Particularly in less developed countries, local firms (mainly in infant industry) might not be able to develop unless foreign competition is restricted by a combination of import tariffs and controls on FDI.

+ Ownership restraints are based on the belief that local owners can help maximize the resource-transfer and employment benefits of FDI for the host country. (Japanese government prohibited most FDI, but allowed joint ventures between Japanese firms and foreign MNEs that had a valuable technology, believed that it would speed up the subsequent diffusion of the MNE’s technology throughout the Japanese economy).

• Performance requirements can also take several forms. They are controls over the behavior of the MNE’s local subsidiary. The most common performance requirements are related to local content, exports, technology transfer, and local participation in top management.

The main reasons:

+ such rules help maximize the benefits and minimize the costs of FDI for the host country. Many companies employ some form of performance requirements when it suits their objectives. However, performance requirements tend to be more common in less developed countries than in advanced industrialized countries.